Startup mentors discuss strategies and challenges of creating a new business.

Get Paying Users by Giving Your App Away

GUEST MENTOR, Anthony Smith, CEO of Insightly: There is no best business model for apps. They are not one-size-fits-all, and the only way to determine the right money-making strategy is to identify your market and your users. For example, if you’re a business-to-business company, or a business-to-very-small-business company, the freemium business model can lead to real revenue. This business model works best for those “B2VSB” companies that have expansive target markets, a product that impacts the user’s daily life, and a plan for converting freemium users to paid ones.

To go with freemium, make sure your audience is vast. The typical conversion rate from freemium to paid ranges from 3 to 10 percent, so the prospect pool needs to be deep to sustain your business. This is part of the reason why it makes sense for B2VSB companies to leverage the freemium model. According to the Small Business Administration, there were almost 28 million small businesses (500 employees or fewer) in the U.S. in 2009. If you were to secure free accounts for 2% of those businesses and then convert 3% of them into paying customers, your freemium model would yield nearly 17,000 paying customers.

To get to that point, you need an app that quickly becomes vital to the user, even in the freemium version. Does the app make the user’s work life more productive, efficient or organized? Does it help the user grow her business or analyze sales and productivity? If so, it’s far more likely that the user will see the value in the freemium model and become receptive to paying for additional features. In the meantime, your freemium base can serve as a source of quality leads, as a built-in focus group, and as a spark for potential virality.

Before you transition customers from freemium to a paid version of your app, you need to determine whether to charge them by transactions or users; your choice could determine whether giving the product away for free turns out to be a money-making decision or not. Users often prefer the transaction model because it’s a pay-as-you-go proposal – an easy transition from freemium. However, some companies see this as a way to nickel-and-dime customers, and they instead opt for user licenses, which can be easier on customers who need to budget for your app. A third option combines both of these payment models by selling a certain number of transactions per user license.

Evaluate your own business realities and those of your prospects to determine which monetization path will be most attractive. And remember, numbers matter but customer affinity is the real key to making freemium pay off for your business.

About The Accelerators

For aspiring or actual entrepreneurs, The Accelerators is an online archive of discussion among startup mentors– entrepreneurs, angel investors and venture capitalists. Although the blog is no longer being updated, its content lives here and you can see an archive of its tweets through June 2015 @wsjstartup.